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Pakistan banks earnings likely to rise

Since March 2020 State Bank of Pakistan has cut interest rate by 625bps. It had also imposed restriction on payment of dividend and issue of bonus shares for two quarters. The two measures were taken to ensure ample liquidity in the market. Now the central bank has made lending for housing mandatory for the banks. On top of all there seems to be no containment in government borrowing from banks. Though, the SBP has deferred announcement of Monetary Policy in July, there is demand for further reduction in policy rate.

This makes it all the more to explore the likely results of banks for the quarter ended 30th June 2020. According to a report by Topline Securities earnings of banks are likely to grow by 25%QoQ for 2QCY20. It also anticipates Net Interest Income (NII) to increase by 16%QoQ, but does not expect cash payouts with the results, in line with the earlier Central Bank directives.

Since March 2020, the central bank has lowered the Policy Rate by 625bps to 7%. One can also recall that in March 2020, the SBP had also made the interest rate corridor symmetric around the Policy Rate, resulting in 50bps lower fall in MDR vis-à-vis the Policy Rate.

The immediate re-pricing of deposits is likely to lead to decline in interest expense by 9%QoQ, while the lagged impact on the asset side is expected to keep interest earned afloat with a marginal increase of 1%QoQ.

The brokerage house estimates Non Funded Income (NFI) to decline by 9%QoQ largely owing to the relief measures announced by the central bank in the wake of COVID-19 pandemic. That said, there may be some respite from potential capital gains on PIBs (like last quarter) and equity investments as KSE-100 has recorded a return of 18% for the quarter.

The relief measures, which also included delayed principle payments and restructuring of loans, may hint at lower provisions. However, it is believed that the banks may prudently provide for risky assets, which may cause the provisions to go up by 16%QoQ in 2Q2020.

The sector as a whole has posted a growth of 7%QoQ in Deposits and an increase of 15%QoQ in Investments, with Advances remaining largely unchanged.

 

MCB earnings for the quarter are likely to rise to Rs6.4/share; an increase of 14%QoQ with NII is expected to grow by 11%QoQ. To recall, the Bank in 1Q2020 posted a capital loss of Rs6 million. Given the market performance, and potential gains from the PIBs portfolio, NFI is likely to increase by 13%QoQ primarily driven by capital gains.

UBL earnings are expected to rise to Rs4.6/share, up 14% QoQ. Although, NII is expected to increase by 7%QoQ, the key concerns weighing down quarterly earnings are provisions, largely emanating from the international portfolio.

MEBL earnings are likely at spike to Rs4.9/share, up 15% QoQ. Interest earned is expected to be largely stable as interest payments continue on advances but a key advantage for the bank will be from interest expense, which is expected to decline by 10%QoQ. NFI is expected to post a decline of 7%QoQ. Provisions are expected at similar quantum as that of last year, for the bank to maintain its 147% coverage ratio.

NBP is likely to post EPS Rs2.2, up by 11%QoQ. The decline in interest rates is expected to be positive for the Bank. However, higher provisions expected to contain increase in profitability.

BAHL is expected to post an EPS of Rs3.7 on the back of NII rising by 25% QoQ. NFI is expected to be driven by capital gains, which were close to zero for 1QCY20.

BAFL earnings for the quarter are expected to rise to Rs1.9/share, up by 17%QoQ. Given the high CASA of the Bank, decline in interest expense is likely to be limited to 5%QoQ. Decline in other elements of NFI are expected to be overshadowed by the expected capital gains following a loss of Rs47mn recorded in 1Q2020.

BOP earnings growth is expected to translate into an EPS of Rs0.8. Current accounts constitute only 16% of total deposits for the bank making the decline in interest rate extremely beneficial for the bank as interest expense is poised to decline by 10%QoQ, consequently pushing NII up by 35%QoQ. Early adoption of high yielding PIBs mostly on fixed rate are expected to maintain interest earned.

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